Ballou v. United States, 16309.
Decision Date | 22 December 1966 |
Docket Number | No. 16309.,16309. |
Citation | 370 F.2d 659 |
Parties | James D. BALLOU and Sarah L. Ballou, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee. |
Court | U.S. Court of Appeals — Sixth Circuit |
Alan R. Vogeler, Cincinnati, Ohio, for appellants. Kyte, Conlan, Wulsin & Vogeler, Cincinnati, Ohio, of counsel.
I. Henry Kutz, Dept. of Justice, Washington, D. C., (Richard M. Roberts, Acting Asst. Atty. Gen., Meyer Rothwacks, Alec A. Pandaleon, Attys., Dept. of Justice, Washington, D. C., on the brief); E. Winther McCroom, Asst. U. S. Atty., Cincinnati, Ohio, of counsel, for appellee.
Before PHILLIPS, Circuit Judge, McALLISTER, Senior Circuit Judge, and BROOKS, District Judge*.
This is an income tax case, involving the bona fides of a family partnership operated under the name "Ballou Services" and engaged in the business of providing office services to the public.
The taxpayers, a husband and wife, attempted to create a new partnership to carry on their office service business, which they had conducted previously as equal partners. The new partnership was to consist of the taxpayers individually, and the husband as trustee of separate trusts for each of their three minor children, whose ages were seven years, five years and eight months respectively.
In pursuance of this plan, the taxpayers executed instruments conveying to the husband as trustee for each child a capital interest of fifteen per cent in the partnership. A formal partnership agreement thereupon was executed by the husband and wife and the husband in his capacity as trustee for the three minor children.
The Internal Revenue Service refused to recognize the trusts as valid partners and taxed the income of the partnership to the husband and wife for the years 1956, 1957 and 1958. The taxpayers paid the difference plus interest totaling $32,217.05, and filed suit for refund, demanding a jury trial.
The jury returned a general verdict in favor of the United States and also answered in the negative the following interrogatory submitted by the district judge:
"Have the plaintiffs proven by a preponderance of the evidence that each of the three trusts which they created for their children genuinely owned a fifteen per cent capital interest in Ballou Services?"
The motion of the taxpayers for a new trial was overruled and this appeal followed.
The issue on appeal is whether there is evidence to support the verdict of the jury. The facts are set forth more fully in the comprehensive dissenting opinion of Judge McAllister, to which reference is made.
The present statutory provisions relating to family partnerships originated with the Revenue Act of 1951, effective for taxable years beginning after December 31, 1950, and were codified without substantial change in Section 704(e) of the Internal Revenue Code of 1954.1
The reports of the House and Senate Committees2 contain the following comments:
U. S. Code Congressional and Administrative Service, 82d Cong., 1st Sess. pp. 1814-1815, 2009.
Mertens summarizes as follows the tests to apply to a family partnership such as the one here involved:
A partnership may consist of members of a family and may be recognized for tax purposes, both under the statute (Footnote 1) and under decisions announced prior to the enactment of the statute. Commissioner of Internal Revenue v. Culbertson, 337 U.S. 733, 69 S.Ct. 1210, 93 L.Ed. 1659; Miller v. Commissioner of Internal Revenue, 203 F.2d 350 (C.A. 6); Miller v. Commissioner of Internal Revenue, 183 F.2d 246 (C.A. 6); Kent v. Commissioner of Internal Revenue, 170 F.2d 131 (C.A. 6). The bona fides of a family partnership, particularly one involving minor children who contribute no services, is subject to close scrutiny and is a question of fact to be determined under the particular circumstances of each case.
It has been said that this statute (Footnote 1) does "not legitimatize all family partnerships." Kuney v. Frank, 308 F.2d 719, 720 (C.A. 9).
Thus, a question of fact is presented as to whether a capital interest in Ballou Services is genuinely owned by the three trusts created by the taxpayers for their minor children. The jury, as trier of the facts, determined this issue against the taxpayers and in favor of the Government.
In family partnership cases, as in other cases, the findings of the trier of the facts will not be disturbed on appeal, if supported by substantial evidence and not clearly erroneous. Dulworth v. United States, 302 F.2d 266 (C.A. 6); Acuff v. Commissioner of Internal Revenue, 296 F.2d 725 (C.A. 6); MacDonald v. Commissioner of Internal Revenue, 165 F.2d 213 (C.A. 6); De Korse v. Commissioner of Internal Revenue, 158 F.2d 801 (C.A. 6).
Under the record in the present case, we cannot say that there is no evidence from which the jury, as triers of the facts, could not have reached its verdict against the taxpayers and in favor of the Government. Under the provisions of the partnership agreement and trust instruments, the husband and father retained the same control of the management of the new partnership as he had previously exercised over the old partnership. Neither the minor children nor their father in his capacity as trustee contributed any services to the partnership or participated in the daily operation of the business. Under an express provision of the partnership agreement, the father in his capacity as trustee was prohibited from performing any service for the partnership. The forty-five per cent share of the partnership assets held in trust for the minor children could not be sold or reinvested except with the consent of the father and mother as owners of the remaining fifty-five per cent interest. No single factor...
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